October 9, 2014
Municipal bankruptcies are very rare but a spate of filings, including the largest municipal bankruptcy in U.S. history by the City of Detroit, and ongoing municipal budgetary stress around the country has led to discussions of what, if anything, states should do to assist distressed cities. This blog will provide an overview of current state statutes that govern fiscally stressed municipalities and other units of local government in Illinois.
The Civic Federation has previously written in 2012 about municipal bankruptcy here. Since that time, the City of Detroit has entered bankruptcy under Chapter 9 of the United States Bankruptcy Code, as have two cities in California: Stockton and San Bernardino. Cities in Illinois cannot directly file for bankruptcy, but proposed legislation has been introduced by Illinois State Senator Kimberly Lightford as Senate Bill 1365 that would allow a municipality to file a petition and exercise powers pursuant to applicable federal bankruptcy law.
Municipal governments in Illinois facing financial distress have not been absent from the media. The Securities and Exchange Commission (SEC) recently halted the issuance of bonds and filed fraud charges against the south suburban City of Harvey and its financial advisor for allegedly diverting limited obligation bond proceeds to pay for the city’s operational expenses. In addition, the Cook County Sheriff, alongside officials from the Illinois Comptroller’s Office, recently stepped in to audit Harvey’s financial records and the City of Chicago filed a lawsuit against the City of Harvey to recoup over $20 million in unpaid water charges and late fees. While Harvey is an extreme example, there are many financially distressed cities in Illinois, but the mechanisms available to the State to assist them are seldom used.
In 1990 Public Act 86-1211 was signed into law by then Governor James R. Thompson creating the Financially Distressed City Law and the Local Government Financial Planning and Supervision Act. The Financially Distressed City Law allowed the State to assist the City of East St. Louis with its financial challenges. In 2009 the neighboring Village of Washington Park sought bankruptcy protection under Chapter 9 of the bankruptcy code, but was denied because it did not have authority under the Local Government Financial Planning and Supervision Act. The Local Government Financial Planning and Supervision Act is the only Illinois state statute that allows local governments that meet certain criteria to file for municipal bankruptcy protection under Chapter 9 of the Federal Bankruptcy Code.
In order for a municipality to seek assistance from the State under the Financially Distressed City Law, the corporate authorities must first pass a local ordinance requesting the State certify the municipality as a fiscally distressed city. Similarly, a local government may only seek assistance from the State under the Local Government Financial Planning and Supervision Act by passing a local ordinance by a 2/3 vote petitioning the Governor to establish a commission.
Under the Financially Distressed City Law, a financially distressed city is defined as a home rule municipality as provided in Section 6 of Article VII of the Illinois Constitution and is certified by the Illinois Department of Revenue as:
- Being in the highest 5.0% of all home rule municipalities in terms of the aggregate of the rate percent of all taxes levied pursuant to statute or ordinance upon all taxable property of the municipality and being in the lowest 5.0% of all home rule municipalities in terms of per capita tax yield; and
- Designated by joint resolution of the Illinois General Assembly as a financially distressed city.
Under the Local Government Financial Planning and Supervision Act, a local unit of government with a fiscal emergency is defined as a local unit of government that has a population less than 25,000 residents and meets one or more of the following three conditions:
- The existence of a continuing default in the payment of principal and interest on any debt obligation for more than 180 days;
- The failure to make payment of over 20% of all payroll employees of the unit of local government in the amounts and at the times required by law, ordinances, resolutions, or agreements, which failure has continued for more than 30 days after such time for payment, unless at least 2/3 of the employees affected by such failure to pay, acting individually or by their duly authorized representative, consent in writing to an extension; and
- The insolvency of the unit of local government, being a financial condition such that the unit is a) generally not paying its debts as they come due unless they are the subject of a bona fide dispute or b) unable to pay its debts as they come due.
Both of these laws address financial challenges after the fact, but do not provide for a warning system for the financial state of municipalities and local governments that are facing fiscal distress. Under the Governmental Account Audit Act, local governments are required to file annual financial reports with the Illinois Comptroller’s Office, but some governmental units do not comply with the law.
The Fiscally Distressed City Law allows the Governor to create an authority comprised of five directors to provide a secure financial basis for and to furnish assistance to a financially distressed city according to the guidelines outlined in the statute. The Local Government Financial Planning and Supervision Act allows the Governor to create a commission comprised of 11 members, primarily charged with developing a detailed financial plan and other recommendations to ensure proper financial accounting procedures, budgeting and taxing practices to assure the fiscal integrity of the unit of local government. The state can also provide loans and state bonding authority to assist the municipalities.
To read more about state intervention laws, refer to the PEW Charitable Trusts report titled: “The State Role in Local Government Financial Distress” and a publication authored by Civic Federation Board member James Spiotto, one of the nation’s leading municipal bankruptcy experts.
 The Financially Distressed City Law (65 ILCS 5/8) is intended for home rule municipalities. The Local Government Financial Planning and Supervision Act (50 ILCS 320) is intended for non-home rule municipalities that have a population of fewer than 25,000 residents.
 50 ILCS 320/9
 65 ILCS 5/8-12-4
 50 ILCS 320/4
 65 ILCS 5/8-12-3
 50 ILCS 320/3